China Urges Coal Cuts

Mines overproduce as prices plunge.
An analysis by Michael Lelyveld
coal2_305 Workers take a break at a coal yard in Huaibei, east China's Anhui province on Feb.7, 2010.

China's government is pushing its provinces to curb coal production as the economy struggles, prices slide and stockpiles grow.

On Oct. 12, a National Energy Administration (NEA) official urged coal producing regions to keep this year's production growth below 4 percent, the official English-language China Daily reported.

That would be less than half of last year's 8.7-percent rise in output, according to data from the Ministry of Industry and Information Technology.

While some analysts see signs that the slow-growth trend in the economy may be bottoming out, mining centers appear to be overproducing in a slumping market to keep revenues up.

Coal output in the Inner Mongolia Autonomous Region soared 11.5 percent in the first eight months of the year, while production in Shanxi province rose 7.7 percent, China Daily said.

During the same period, nationwide coal production climbed 4.4 percent, outpacing consumption growth of just 1.4 percent, the state's Xinhua news agency reported.

Coal prices plunged 20 percent between May and August at the northern Qinhuangdao coal port, said China Daily, citing data from

In normal times, low prices would be welcomed as a way to limit the losses of power companies that supply electricity at state-controlled rates, said NEA deputy director Wu Yin.

"However, when the prices drop to a severely low level, it will harm both the coal industry and its downstream industries," Wu said.

Coal prices have shown only slight improvement since starting to plunge five months ago.

Electricity figures also suggest that provinces are overproducing. Power consumption in September rose only 2.9 percent from a year before.

Power plants have some 90 million metric tons of coal on hand, or 29 days of supply, about twice as much as normal, according to the NEA.

Prolonged slump

The overproduction may raise the risk of prolonging the price slump, creating a problem that feeds on itself.

"Local governments have been supporting the coal companies in order to maintain local employment and revenues," said Philip Andrews-Speed, principal fellow in the East Asia program of the National University of Singapore's Energy Studies Institute.

"The question is to what extent the central government will be able to successfully command the mines to reduce output," Andrews-Speed said in an email message.

Similar forces came into play during the Asian currency crisis in 1998, when local mines produced at least 200 million tons more coal than recorded in official data, said Andrews-Speed.

Many small mines have since been shut down, but some producers will still exceed quotas with support from local governments, he said.

Kevin J. Tu, director of the China energy and climate program at the Carnegie Endowment for International Peace in Washington, said the official data has been hard to interpret, especially since provinces like Shanxi and Inner Mongolia have been reporting high growth.

"It is very difficult to make sense of China's different coal statistical indicators now," said Tu. "It is hard to imagine how these major coal producing provinces can keep such high production growth rates while the demand is simply not there."

It's also unclear whether the bigger stockpiles at power plants can explain the gap between official production and consumption, particularly since China's coal imports have climbed over 46 percent in the first eight months of the year.

Officially, China imported a record 182 million tons of coal last year as other producing nations competed in a low-priced market. China also produced a record 3.52 billion tons, nearly four times more than the second-place United States.

Faulty data

Questions about China's notoriously faulty data may be helping to disrupt market signals, leading to price distortions, mistakes in production levels and misreading of supply and demand.

One possibility is that officials in some provinces may still be reporting high production despite low demand in the belief that bullish figures will advance their careers.

Another interpretation is that hard times have forced mines to compete even harder, despite the risk of producing more for less.

China's rising coal stockpiles drew international attention several months ago as economists tried to gauge the true extent of the country's slowdown, said Trevor Houser, partner at the Rhodium Group, a New York-based consulting firm.

"In June, there was concern that coal inventories were rising, power production data was slowing, so people thought, given the coal inventory data, that even the modest power production data was being overstated," Houser said.

Since then, the coal and power figures may have become even tougher to interpret as economists seek signs of a turnaround.

In the third quarter, China's GDP growth slowed to 7.4 percent from 7.6 percent in the previous quarter. But nine-month growth of 7.7 percent remained above the government's target of 7.5 percent for the year, the National Bureau of Statistics (NBS) said.


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